Bankruptcy is among the last stops for a client in money trouble, and one that entails a lot of decisions regarding taxes.

Bankruptcy filings fell slightly for the year ended March 31, according to the Administrative Office of the U.S. Courts. Bankruptcies filed in March alone were mixed, as non-business filings, which includes consumer filings, fell sharply as new business bankruptcies increased.

Both trends will likely rise, experts predict, amid a surge of business and personal bankruptcies as the pandemic continues to ravage the economy.

The most common categories of bankruptcy are Chapter 7 and Chapter 13.

“Chapter 7 bankruptcy is a debt-forgiveness plan,” said Gregory Wade, bankruptcy attorney at the law firm Wade, Grimes, Friedman, Meinken and Leischner in Alexandria, Va. “It involves asking the bankruptcy court to dismiss the majority of debts with exceptions, such as taxes, alimony and child support.” Chapter 13 offers both a debt-forgiveness plan and a debt-repayment plan, establishing a repayment percentage based on assets, income and the size of debts.

All tax returns must be filed before you file for bankruptcy; this determines your tax liability. But you may not have to pay those taxes immediately.

“The bankruptcy relief that you can get is not dependent on you having the funds to pay your taxes, but you do have to file so that anybody can have disclosure on your financial life,” Wade said, adding, “if you have an extension to file through October and you decide that you’re going to file for bankruptcy in June, that tax deadline disappears. You have to file your taxes before you file bankruptcy.”

According to the IRS, during a bankruptcy case you should pay all taxes that come due. Failure to file returns or pay current taxes during your bankruptcy may result in a tax case being dismissed.

Indeed, taxes are a different category of debt. “Many people think that taxes aren’t dischargeable by bankruptcy. That’s false,” Wade said. “Taxes can be discharged and forgiven in bankruptcy, but there are limits. The most common limit is that taxes have to be more than three years old and you have to have filed your tax returns more than three years before you file bankruptcy.”

When to file for bankruptcy matters, especially if a client owes a lot in taxes. “Let’s say it’s July and you know those taxes are not three years old,” Wade said. “You have to make a strategic decision whether to file the bankruptcy now, knowing it’s premature to get taxes discharged. But there may be other benefits from the bankruptcy that overweigh paying the taxes.”

Houses can be an emotional trigger in bankruptcy. “When they talk about losing your home, a lot of people are blinded by that fear and they can’t see the financial consequences of doing something in a certain way because they absolutely don’t want to lose the home,” Wade said. “In many cases, the smartest thing to do is let the home go.”

“The biggest mistake that clients make [regarding] bankruptcy is that they don’t realize the long-term impact in getting credit, reputational risk and publicity,” said Brent Lipschultz, partner in the personal wealth advisors group at EisnerAmper, New York.

“Seek financial planning assistance. For example, in 2020, one can borrow from retirement plans or an IRA under the CARES Act, avoiding the penalty if younger [than] 59½ and paying tax over three years on distribution or no tax if the money is put back into the plan,” Lipschultz said. Restrictions regarding being affected by the pandemic do apply.

Wade, who discouraged tapping an IRA or 401(k) to pay off debt, said that Chapter 7 offers individuals a way to get a discharge on debts; a corporation does not get a discharge. “One thing you can do is simply give the corporation away,” Wade said. “Those debts are unpayable because the corporation is gone.”

He also suggested establishing residency in a state with a homestead exemption, though many restrictions to that exemption apply.